LE

Many taxpayers own a second property, i.e. in addition to their own home. This property may have been inherited, or it may have been bought as an investment (e.g. to generate rental income, such as 'buy to let'). This 1 minute guide deals with residential property which is let out and subsequently sold by UK resident taxpayers.
10 Key Points

1. How is income from a second property taxed?

The income from a second (and additional) let property is taxable as a 'Schedule A business'. This broadly means that receipts and expenses from all UK properties are aggregated to produce a profit or loss. The profits taxed are normally those of the tax year itself (i.e. 6 April to the following 5 April), and is dealt with under self-assessment. Special rules apply to the UK rental income of non-UK residents.
2. How is rental income calculated?

Rental profits are calculated in broadly the same way as business profits. Expenses must be 'revenue' in nature (e.g. accountancy fees, repairs etc), as opposed to 'capital' (e.g. the cost of the building, surveyors fees and legal fees), and must be 'wholly and exclusively' incurred for business purposes. Capital allowances for certain fixed assets are deducted as a business expense.
3. How are rental losses treated?

Rental losses can be carried forward and set off against future rental profits, or can be set off against total income of the same or next following year if they relate to capital allowances or allowable agricultural expenditure.
4. What tax relief can be claimed for furniture and fittings?

Capital allowances cannot be claimed for expenditure on furniture, fixtures and fittings in let residential property. However, a 'wear and tear' allowance may be claimed instead. The calculation of this allowance is 10% of net rents (i.e. rents less payments that would normally be borne by the tenant, such as water rates). An alternative allowances to the wear and tear claim is the 'renewals basis'. Under this method, no relief is given for the original cost of furniture, fixtures etc, but a deduction may be claimed for the cost of replacing the asset.
5. Can tax relief be claimed for interest paid on property loans?

Yes, tax relief can be claimed in respect of interest paid on a loan to buy property which is let. The loan interest is claimed as a deduction from rental income. Some taxpayers extend their mortgages to buy a second property. However, it can sometimes be difficult to distinguish between the loan interest paid on your mortgage and the interest paid on your let property. Separate loans (or alternatively separate loan interest certificates from your lender) should make life more straightforward!
6. What about tax relief for the cost of the let property?

The cost of the house is capital (i.e. liable to capital gains tax, not income tax), as is the cost of any additions or improvements (e.g. an extension or a new patio). However, if damaged parts of capital items (e.g. kitchen cupboards) are replaced with the nearest modern equivalent of a similar standard, a deduction may usually be claimed. But if they are replaced with expensive, customised and higher quality versions, the Inland Revenue may regard this as capital expenditure and income tax relief could be denied. However, the taxman does accept that replacing single glazed windows with double glazed equivalents count as expenditure on repairs.
7. What happens when the let property is sold?

When you sell let residential property (which has never been your main residence), any gains (i.e. increase in value between buying and selling the property) is normally liable to capital gains tax. This tax is charged on total gains in tax year, less:

* Capital losses (of the same year, a previous year or carried back on death);
* Taper relief (if this is available) at the non-business asset rate (unless the property is a 'furnished holiday letting' - see below); and
* The annual capital gains tax exemption.

There are also certain shelters from capital gains tax (such as 'Enterprise Investment Scheme' or 'Venture Capital Trust' investments) that could be considered. In some cases, a gain on the disposal of land can be liable to income tax, not capital gains tax, under certain tax avoidance legislation 'to prevent the avoidance of tax by persons concerned with land or the development of land'. Professional advice in this area is strongly recommended.
8. Can anything be done to save tax?

Quite possibly! For example, married couples may wish to consider owning and renting the let property jointly. This would enable the rental business profits to be divided equally between them (so that two sets of personal allowances and basic rate tax bands are potentially available to reduce the overall income tax liability). When the property is sold, both spouses may also be able to deduct the annual capital gains tax exemption from any gain on disposal, to the extent that those exemptions have not been used elsewhere.
9. What if the second let property is a holiday home?

Special tax treatment applies to 'furnished holiday lettings'. For example, any loss arising can be set off against other (non-rental) income; profits are treated as earned income for pension purposes; and furnished holiday lettings are generally treated as a trade for the purposes of claiming various types of capital gains tax relief, such as taper relief. However, certain conditions must be satisfied for furnished holiday lettings treatment to apply, and professional advice in this area is once again recommended.
10. How are property leases treated for tax?

The grant or assignment of a lease on the property for more than 50 years is treated as a disposal for capital gains tax purposes. If the lease is for 50 years or less, part of the least premium is treated as additional rental income which is taxable in the year the lease is granted (i.e. the amount of the premium less 2% for each complete year of the lease, except the first). The rest is subject to be capital gains tax rules.

Old-Salt

I own a house and have a very small mortgage. I want to buy elsewhere. Selling current house is an option but the current market is not great so that might take some time. As an alternative I am considering renting my current house (I am led to believe that this should not be too difficult). How can I best maximise my tax position when renting out? Can I remortgage current house and use the capital to buy an other property?

Swinger

Yep, it's what I did. I used a broker though as I did both the remortgage of my old house to a buy to let mortgage and a new mortgage on a house I moved to at the same time.

If you get a buy to let mortgage on your house for the maximum you can - usually this will be calculated by a surveyor working out how much rental you can get for the property and then ensuring that the maximum you pay on the mortgage is (mostly) 80% of that figure.
i.e. potential rental = Â£500, max monthly mortgage repayment is Â£400
Then you work out how much you can borrow for a Â£400 monthly repayment

Be careful as some lenders will look at the total of all your 'debts' when granting you a mortgage on you new house, others will treat the rental income as separate - which is why I used a broker as they do it all the time.

Old-Salt

Crow

If you are considering letting your house out, there are a few things you need to consider. The information given earlier in this thread is useful, so read that first.

You will need to let your mortgage provider know that you're going to let the house out and they will want you to take on a buy-to-let mortgage on the property. It may not be important, but currently mortgage providers are only offering a maximum loan to value of 75% for buy-to-lets.

You'll also need to continue paying buildings insurance and you'll also need to let your insurance provider know that the property is going to be let out. They'll most likely charge you an additional premium.

Use a reputable letting agent! Fess paid to letting agents can be off-set against your tax liability.

You will also need to have a Landlords Gas Safety Certificate (approximate cost from Â£50) and an EPC - Energy Performance Certificate (approximate cost depending on size of property, but guesstimate from Â£65).

Old-Salt

Clanker

Interestingly enough, www.moneysavingexpert.com armed forces money saving forum is full of cases where quite a lot (not all)lenders treat HM Forces differently, ie they allow you to rent out your home on a residential mortgage (and not on a buy to let). As always it seems a grey area but looking at it they seem quite sympathetic. Worth a look for anyone thining about this as this could be worth 000s of quid to some of us.

LE

If it helps - I rent my home and live in SFA due to the transitional nature of service life. My wife and I fill out an annual self assessed tax return online (it works out the hard sums for you). It is easy, once you have jumped through the hoop once.

First time took us over a day. Now it takes about 1 hr as we keep all the necessary paperwork handy.